SEC Charges Former American Home Mortgage Executives for Misleading Investors About Company's Financial Condition
Former CEO Agrees to Pay $2.45 Million to Settle Fraud Charges
FOR IMMEDIATE RELEASE
Washington, D.C., April 28, 2009 — The Securities and Exchange Commission today charged two former executives at American Home Mortgage Investment Corporation for engaging in accounting fraud and making false and misleading disclosures to conceal from investors the company's worsening financial condition in early 2007 as the subprime crisis emerged.
The SEC alleges that former chairman and CEO Michael Strauss and former CFO Stephen Hozie fraudulently understated American Home Mortgage's first quarter 2007 loan loss reserves by tens of millions of dollars, converting the company's loss into a fictional profit. The SEC alleges that Strauss and Hozie also misled investors about the financial condition of the company, including the riskiness of the mortgages originated and held by American Home Mortgage.
The SEC additionally charged Strauss, Hozie and the company's former controller, Robert Bernstein, with misleading American Home Mortgage's auditor among other violations. Strauss has settled the SEC's charges by agreeing to pay more than $2.45 million and consenting to a five-year officer and director bar.
"These senior executives did not just occupy a front row seat to the mortgage meltdown — they were part of the show," said Robert Khuzami, Director of the SEC's Division of Enforcement. "As the housing market imploded, these executives kept secret that the company's holdings were collapsing like a house of cards."
James A. Clarkson, Acting Director of the SEC's New York Regional Office, said, "As alleged in our complaint, these defendants suppressed the warning signs of the mortgage crisis and its impact on American Home Mortgage's business to the detriment of investors and the broader market."
According to the SEC's complaint, Strauss and Hozie intentionally understated the company's reserves despite knowing that American Home Mortgage's own internal analysis showed that the company needed at least $38 million in additional reserves. The analysis also showed that the company's losses on its delinquent second liens were mounting quickly and that American Home Mortgage would lose at least 72 percent of the value of these loans after the properties went through foreclosure. Strauss and Hozie knowingly failed to reserve adequately for the expected losses caused by the company's delinquent loans. Strauss, Hozie and Bernstein also misled American Home Mortgage's auditor about the adequacy of the reserves for the first quarter of 2007.
The SEC further alleges that Strauss and Hozie misled investors about the company's liquidity, including failing to disclose that American Home Mortgage was forced to sell the majority of its multi-billion dollar mortgage-backed securities portfolio in April 2007 to meet pressing liquidity demands. Strauss and Hozie also made misleading disclosures about the riskiness of the mortgages that the company originated and held. American Home Mortgage actually originated the majority of its loans in 2006 on a "stated income" basis without verifying the borrower's income.
The SEC's complaint seeks a final judgment permanently enjoining the defendants from future violations of the federal securities laws and ordering them to pay financial penalties and disgorgement of ill-gotten gains plus prejudgment interest. The complaint also seeks a judgment barring Strauss and Hozie from serving as officers or directors of any public company.
Strauss agreed to settle the SEC's charges without admitting or denying the allegations. He will be permanently enjoined from violating the antifraud, reporting, record-keeping, and internal controls provisions of the federal securities laws and will pay approximately $2.2 million in disgorgement and prejudgment interest and a $250,000 penalty. Strauss also will be barred from serving as an officer or director of a public company for five years. The litigation against the other defendants is ongoing.
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For more information, contact:
Andrew M. Calamari
Associate Director — Enforcement, SEC's New York Regional Office
Assistant Director — Enforcement, SEC's New York Regional Office